If you get turned down for a loan or line of credit, an adverse action notice can explain why. Although you might not be able to fix the problem with your credit overnight, knowing what’s wrong will help you take steps in the right direction. Here’s how an adverse credit notice works, and how it can help you identify and address the problems on your credit report.
If your application for credit, insurance or employment is denied due to something on your consumer report, the creditor may be required to send you an adverse action notice. This notice explains why you were turned down.
However, since there are two regulations governing adverse action notice requirements, what’s in the letter itself can vary.
First, there’s the adverse action notice dictated by the Fair Credit Reporting Act (FCRA). There’s also the adverse action notice dictated by the Equal Credit Opportunity Act (ECOA).
Here’s an abbreviated version of adverse action notice requirements as they pertain to each law. You can also check out Consumer Compliance Outlook for more detailed descriptions.
FCRA adverse action notice requirements
What is an FCRA adverse action notice? According to Consumer Compliance Outlook: “The FCRA’s requirements for adverse action notices apply only to consumer transactions and are designed to alert consumers that negative information was the basis for adverse action.”
Examples of consumer transactions include denial for credit, insurance, employment, government licenses or benefits, or rentals. You may also experience increased charges for everything just listed, or unfavorable changes to existing terms for them.
ECOA adverse action notice requirements
The ECOA adverse action notice takes effect when a credit application is denied. It also takes effect if a counteroffer on an application is refused by the consumer. According to Consumer Compliance Outlook:
“Adverse action notices under the ECOA and Regulation B are designed to help consumers and businesses by providing transparency to the credit underwriting process and protecting against potential discrimination by requiring creditors to explain the reasons adverse action was taken.”
Additionally, it takes effect if an application to increase credit on an existing account is denied. But if a consumer withdraws their application or accepts a counteroffer, there is no adverse action notice requirement.
The most important thing to remember is this: the adverse action notice requirements under ECOA only apply to credit. The FCRA adverse action notice, meanwhile, applies to credit and other types of applications, as listed above.
An adverse action notice should be fairly straightforward. That’s because its main purpose is to tell you why your application was denied.
Therefore, there are requirements dictating what has to be on your notice when a credit reporting agency (CRA) sends you one. Below is a paraphrased version of the Federal Trade Commission’s requirements:
- Name, address and phone number of the CRA.
- Your credit score if it was used in the decision-making process.
- Statement explaining why the denial happened.
- Your right to a free copy of the credit report from the CRA.
- Your right to dispute the information on the report.
If you receive an adverse action notice from a CRA, make sure all of this is included. And remember, it’s your right to receive this information.
Having your application denied is frustrating.
But a notice of adverse action can actually be a good thing. It’s designed to enforce fair treatment of applicants and to empower you for improving your chances for approval the next time around.
So how can you turn what you’ve learned from an adverse action notice into future approval? Follow these six steps:
1. Get your credit report
2. Fix any errors on your credit report
3. Understand the factors playing into your credit score
4. Make all of your payments on time
5. Focus on paying down debt
6. Keep checking your credit report
Your credit report is a detailed list of your financial accounts provided by a credit reporting agency like Experian.
That’s why you should be given access to a free copy of your credit report when you get an adverse action notice. Make sure you follow the instructions on your notice to get your copy.
Believe it or not, credit reporting errors are common. This is one reason it’s so important to check yours after receiving an adverse action notice.
Read through your personal information and make sure it’s correct. Even one digit off of a social security number is a huge error. Then, make sure every account on the list is yours.
If you spot anything that’s incorrect, follow these steps immediately to dispute any errors.
Your credit score is calculated and based on a variety of factors. But you don’t have to score perfectly on all points. Each factor is valued differently. That’s why your score comes in a range.
What’s more, we all have more than one credit score. Therefore, the following two steps focus on the two most important factors of your credit score.
Your payment history makes up 35% of your FICO score. That means you can easily improve your score by making your payments on time.
Just make sure you pay all of them on time. Even things like library fines or making late payments on cell phone bills, electric bills, etc., can show up on your report.
Also, keep in mind that a creditor can report you as delinquent as soon as 30 days after your payment is due. So if you don’t think you’ll be able to make your payments, talk to your creditor to see if you can come up with a new payment plan ASAP.
Credit utilization makes up 30% of your score. This is the amount of credit available to you versus the amount of debt you have.
So if you have a credit card with a $1,000 credit limit and a $500 balance, then that card has a 50% credit utilization. Ideally, you want to keep your utilization at 30% or below.
Don’t just check your credit report once, do it annually.
The good news is you can get a free copy of your report from all three credit reporting bureaus once a year from AnnualCreditReport.com.
Then, stay on top of what’s on your credit report to make sure you never receive an adverse action notice due to errors on your report.
While it may not be pleasant to receive an adverse action notice, there is a plan of attack you can follow to overcome the challenges it presents. Diligently follow these steps to stay on top of your accounts.
By taking these steps to fix your credit, you will see improvement in your credit score and report – and sooner than you might think.
Rebecca Safier contributed to this report.